New Fed Program May Create Problem
On the heels of the Federal Reserve announcement of a new round of pump priming for the economy came news this week that it may not be needed. Let’s hope the Fed is careful to avoid creating rather than solving a problem.
Last week the Fed announced it will buy $40 billion in mortgage bonds every month, indefinitely, to make home buying “more affordable.”
But on Wednesday, the government announced increases in sales of both new homes and previously occupied ones.
The Fed’s action may encourage big lenders to take more risks in handing out mortgage loans. Of course, that indeed would give more Americans opportunities to buy homes and perhaps to purchase more expensive ones than they otherwise would have considered.
Sound familiar? It should. For several years, with encouragement from the federal government, big mortgage lenders led by Fannie Mae and Freddie Mac handed out tens of billions of dollars in loans to home buyers who could not repay the money. Some members of Congress encouraged loose standards for borrowers. That caused the so-called “subprime mortgage” meltdown in the housing market.
If the Fed persists in its new program, it simply must avoid creating a new mortgage crisis rather than helping the economy.